For HP, a tough road ahead

There are no quick fixes for Hewlett-Packard. Here's a look at five particularly worrisome areas for the company in 2012.

Hewlett-Packard’s fourth quarter showed that the company has stabilized, but the outlook for 2012 indicates that there are multiple landmines ahead.

Hewlett-Packard

In fact, the longer HP CEO Meg Whitman and CFO Cathie Lesjak spoke on an earnings conference call yesterday, the more it became obvious that revenue growth may be a mere memory for the next few years. Whitman said HP was delivering an outlook for earnings, but not revenue. She added that HP will have to grow organically too. There won’t be any bold acquisitions to save the day.

Add it up and there are no quick fixes for HP. Instead, HP has a bevy of landmines to navigate and oddly enough the PC unit isn’t one of them. Here’s a look at five particularly worrisome areas for HP in 2012.

HP’s mainstay enterprise server, storage and networking unit is starting to sputter.
Revenue for the unit was down 4 percent from a year ago and it is seeing the “effect of a slower economic environment.” This division carried the company in recent quarters.

The Itanium business probably isn’t coming back. Fourth-quarter sales of HP’s business critical systems—the Itanium-based Integrity server line—were down 23 percent from a year ago. Oracle and HP are dueling in court over Itanium and it’s impacting sales. Even if HP and Oracle settle, it’s unlikely customers will flock to Itanium now. Without Itanium, HP has no proprietary processor at the high end of its server lineup. IBM has Power and Oracle has Sparc.

HP Services’ operating profit is falling. HP didn’t invest in services and now margins are taking a hit. Whitman said:

I think it’s really important to level set everyone that this is a journey that’s going to take some time and I think it’s more appropriate to think about the services as more of a ... turnaround that’s measured, success is measured in years as opposed to quarters.

In other words, this chart may look worse before it gets better.

HP Services Q4 FY11

Consumers are cutting back on ink. HP’s imaging and printing business is a cash cow, but it’s a much smaller on than it was just a year ago. Imaging and printing revenue for the fourth quarter was $6.32 billion, down from $6.99 billion a year earlier. Earnings from operations was $808 million, down from $1.22 billion. CFO Lesjak said ink revenue fell 14 percent in the fourth quarter and channel inventory remained high. “Supplies revenue closely follows economic cycles. Sell out continued to be impacted by softness in consumer demand as a result of continued pressure on unemployment globally and was below our expectations in the quarter,” said Lesjak.

The research and development pipeline. HP is at least three years away from funding innovation that will fuel the company’s growth. Whitman laid out the R&D picture. Whitman said:

I think the investments we make in 2012 you’ll start to see in 2014 and 2015. I wish I could tell you differently but it’s not true and you’re right. We cut out a lot of muscle in R&D at this company and we have to invest back in it and so it’s a long term play. We are now building HP; we’re building it to last. We aren’t building it for next month or next quarter. We are building this Company to be great over the next decade. You’ll see improvements every single year. You’ll be able to measure us on how we’re doing but we’re making long term bets here because we just can’t continue to run this company for the short-term.

The problem for HP is that it competes in a space where IBM invests heavily in R&D every year with 6 percent of revenue. Even Dell is increasing its R&D spending. For fiscal 2011, HP spent 2.5 percent of its revenue in R&D.

This story originally appeared at ZDNet's Between the Lines under the headline "HP: Five landmines ahead for 2012."

 

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